GrainCorp and the thorny issue of foreign ownership

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Peter J. Batt does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

No other product category generates as much emotion as food. This should come as no surprise as nations have fought to protect and to provide a reliable supply of food for their burgeoning population since the very dawn of civilisation.

These very same emotions are being triggered now as agribusiness in Australia struggles with the challenges and opportunities that foreign ownership presents. The latest chapter is the proposed takeover of Australia’s largest agribusiness, Graincorp, by US giant Archer Daniels Midlands (ADM), one of the world’s largest integrated grain handlers.

Now the government is in caretaker mode, any takeover deal will have to be approved by the Foreign Investment Review Board, and ultimately the Treasurer, following the election. The Nationals are opposing the deal, although they have stopped short of publicly calling for their Liberal coalition partners to announce their position.

The benefits of foreign ownership, which are well documented, include access to capital, superior technology, superior management and marketing skills, as well as reduced costs (in part through the economies of agglomeration) and improved market access.

But at the heart of the negative response to the takeover bid lies a perception that foreign ownership will potentially reduce or restrict the supply of product to the domestic market. However, with an agribusiness sector worth in excess of A$46.7 billion and a population of just 23 million, Australia is a net exporter (A$36.7 billion) of food, primarily to Asia.

Even in the worst-case scenario, there is very little likelihood of Australia facing a grain deficit, for in what is largely a free market, any company, irrespective of the country of ownership, will endeavour to sell its goods for the highest returns. Market forces will ensure that sufficient grain remains in Australia to meet the domestic demand.

The other and perhaps more sinister issues relate to transfer pricing and anti-competitive behaviour. Transfer pricing enables multinational firms to sell the goods they have produced in Australia to themselves or to an overseas subsidiary company at predetermined prices which minimise tax. These goods are subsequently resold in other markets at significantly higher prices where tax rates are lower.

In this instance, as grain prices are largely determined on the Chicago Board of Trade (CBOT), there is an element of price transparency. Farmers know what they should be getting at the farm gate, minus the costs of storage, transport, grain assessment and receival costs, freight to port, storage and fobbing and currency hedging.

As trading is very much a numbers game (the more grain you handle the cheaper it becomes), ADM’s costs will be lower, so it should therefore be in a better position to pay higher prices to Australian grain farmers. However, to expect ADM to pay any more than they need to in order to remain price competitive is unrealistic, just as it is to ask the supermarket duopoly to pass on more of their profits to producers, or the banks to pass on the full rate reduction to borrowers.

Concerns around anti-competitive behaviour centre around ADM’s potential ownership of the port facilities, sparking fears that it may exclude other users. However, with as much as 70% of the grain on the East Coast being handled by other exporters, it is not in ADM’s best interests to exclude other parties.

Furthermore, ADM have recognised the need to make a substantial investment in these same grain handling facilities. After years of neglect, transportation and logistics systems in rural Australia require an immediate investment to improve the efficiency of transport, especially rail - an investment that both State and Commonwealth governments will struggle to make in the short to medium term.

While we have welcomed such investments from the private sector in the mining industry and indeed, in the construction of toll roads in the major metropolitan cities, there is a reluctance to support parallel private investments in our food logistics system.

In any event, government has the power to ensure that any public-private infrastructure investments - especially at the ports - are available for anyone who wants to use them. How these facilities might be shared and the costs apportioned to those third parties who want to use them should not detract from the need to encourage that investment.

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